Winners, Losers, and the Minimum Wage

Many support the idea of a minimum wage, and usually that support is driven by a desire to help those with less. That inner desire is noble, but minimum wage laws have been around a long time, and people have had plenty of time to study their impact. Even with the best of intentions, if these laws harm those at the bottom, we should discard them.

"No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages, I mean more than a bare subsistence level -- I mean the wages of decent living" (FDR, 1933).

Before looking at the impacts of the minimum wage, it's helpful to review its basic premise. Minimum wage laws assume that any job that doesn't afford a "decent living" is exploiting you.

The largest problem with this premise, besides who determines what constitutes a "decent living," is that, on careful examination, it assumes that an employer can force people to work for an unfair rate. Given that assumption, a minimum wage is required to prevent the employer from abusing that power. In reality, an employer merely offers up a job at a given pay range, much like an electronics store offers up a TV at a given price. The seller and the employer have a range of acceptable prices, but the potential buyers and employees must agree. Of course, we would all like the TV for less and the job for more, but each party's agreement keeps things honest. If many people want the TV, the price goes up, and if many people can do the job, the wage goes down. It's supply and demand, not force.

When basic assumptions are wrong, the outcome is different from what's expected, and the TV analogy above can help us explain how this happens when minimum wages are set.

Assume a politician determines today that charging over $1,000 for a TV is unfair, and he passes a law capping the maximum price. Tomorrow, all $2,000 TVs will be on sale for $1,000, because that's the law, and for the seller, $1,000 is better than throwing the TVs away. People rejoice, and the politician ensures another election victory, but six months later, no one will be making the TV that used to sell for $2,000. You can't run a legitimate business making $2,000 TVs and selling them for $1,000.

This applies directly to minimum wages. Assume our politician instead determines today that jobs paying less than $10 an hour are unfair, and he passes a law raising the minimum wage. Tomorrow, all jobs paying $7.25 an hour now pay $10, because that's the law, and for the business owner, $10 an hour is better than closing up shop. People rejoice, and our politician again ensures an election victory, but six months later, no one will be offering the same job that used to pay $7.25. They can't afford to.

If prices are held constant, employers now need fewer people, each being more productive, to justify the $10 hourly minimum. This conclusion, arrived at through thought experiment, is validated by extensive studies done on the effects of minimum wage increases, including this one from the National Bureau of Economic Research.

Although wages of low-wage workers increase, their hours and employment decline, and the combined effect of these changes is a decline in earned income.

A politician cannot simply decree that a TV be cheap and it is so, nor that a job pays more and it does so. To assume otherwise is to suffer from a God complex. In reality, both the original TV and the original job are replaced with different versions that meet the politician's requirements.

Impact on the Poor

At a low hourly wage, a business owner can afford to hire a person with minimal skills to do a simple job, which means it's easier for those at the bottom to get a foot in the door. Once in, they can learn more aspects of the business and, if they have the capability and desire, move up the ladder. Their knowledge of the business from the ground up will give them a competitive advantage at every rung.

With a high minimum wage, the same business owner can't afford that hire. The employer needs to ensure that the employee will be worth the high wage, and now diplomas, past work history, or an impressive interview are required. With these barriers to entry, those at the bottom can't get a job, and without one, they can't afford an education to learn the skills needed. They become trapped, with no legitimate means to improve their position.

A low minimum wage, or none at all, would allow an apprenticeship system to redevelop in this country. Low-skilled workers could be trained on the job and work their way through the ranks. Instead, as we follow our emotions blindly in support of minimum wages, we increasingly shut the door on one of the best ways to get motivated people out of poverty.

There is nothing self-serving in the motives of the average proponent, but the loudest supporters, who make the minimum wage an issue in each campaign, do have something to gain.

As stated earlier, ideally, the job market is a place where workers compete for the best jobs and businesses compete for the best workers. If two applicants both meet a job's minimum requirements, the person willing to work for less will usually win the job, and in a fair market, that's the end of it. In reality, there are a number of things that the losers can do to prevent competition. The most well-known method is to conspire to set the wages that all employees must be paid. This is the form of collusion employed by labor unions. As with government-mandated minimum wages, union minimum wages prevent low-skilled labor from offering to work for less. If you have to pay an unskilled and skilled worker the same, the skilled worker gets the job.

With this understanding, is it any wonder that unions are usually the loudest proponents for high minimum wages? They understand that preventing the unskilled from competing protects their high wages, and the higher the minimum, the easier it is to demand an increase in their own pay rate. Since unions make up the largest special interests, and donate almost exclusively to Democrats, it's obvious why Democratic politicians support the minimum wage. These groups are not out to help the poor; they are out to help themselves.

If a politician wanted to pass a minimum wage of $50 an hour, he'd be laughed at, because we realize that politicians cannot simply pass a law to make us rich. We should also remember that they cannot do the same to end poverty. We need to return to reality and begin opening the doors to opportunity that we've closed in our ignorance. The next time a Democrat promotes the minimum wage, ask if he is helping the poor or his biggest campaign donor.

Many support the idea of a minimum wage, and usually that support is driven by a desire to help those with less. That inner desire is noble, but minimum wage laws have been around a long time, and people have had plenty of time to study their impact. Even with the best of intentions, if these laws harm those at the bottom, we should discard them.

"No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By living wages, I mean more than a bare subsistence level -- I mean the wages of decent living" (FDR, 1933).

Before looking at the impacts of the minimum wage, it's helpful to review its basic premise. Minimum wage laws assume that any job that doesn't afford a "decent living" is exploiting you.

The largest problem with this premise, besides who determines what constitutes a "decent living," is that, on careful examination, it assumes that an employer can force people to work for an unfair rate. Given that assumption, a minimum wage is required to prevent the employer from abusing that power. In reality, an employer merely offers up a job at a given pay range, much like an electronics store offers up a TV at a given price. The seller and the employer have a range of acceptable prices, but the potential buyers and employees must agree. Of course, we would all like the TV for less and the job for more, but each party's agreement keeps things honest. If many people want the TV, the price goes up, and if many people can do the job, the wage goes down. It's supply and demand, not force.

When basic assumptions are wrong, the outcome is different from what's expected, and the TV analogy above can help us explain how this happens when minimum wages are set.

Assume a politician determines today that charging over $1,000 for a TV is unfair, and he passes a law capping the maximum price. Tomorrow, all $2,000 TVs will be on sale for $1,000, because that's the law, and for the seller, $1,000 is better than throwing the TVs away. People rejoice, and the politician ensures another election victory, but six months later, no one will be making the TV that used to sell for $2,000. You can't run a legitimate business making $2,000 TVs and selling them for $1,000.

This applies directly to minimum wages. Assume our politician instead determines today that jobs paying less than $10 an hour are unfair, and he passes a law raising the minimum wage. Tomorrow, all jobs paying $7.25 an hour now pay $10, because that's the law, and for the business owner, $10 an hour is better than closing up shop. People rejoice, and our politician again ensures an election victory, but six months later, no one will be offering the same job that used to pay $7.25. They can't afford to.

If prices are held constant, employers now need fewer people, each being more productive, to justify the $10 hourly minimum. This conclusion, arrived at through thought experiment, is validated by extensive studies done on the effects of minimum wage increases, including this one from the National Bureau of Economic Research.

Although wages of low-wage workers increase, their hours and employment decline, and the combined effect of these changes is a decline in earned income.

A politician cannot simply decree that a TV be cheap and it is so, nor that a job pays more and it does so. To assume otherwise is to suffer from a God complex. In reality, both the original TV and the original job are replaced with different versions that meet the politician's requirements.

Impact on the Poor

At a low hourly wage, a business owner can afford to hire a person with minimal skills to do a simple job, which means it's easier for those at the bottom to get a foot in the door. Once in, they can learn more aspects of the business and, if they have the capability and desire, move up the ladder. Their knowledge of the business from the ground up will give them a competitive advantage at every rung.

With a high minimum wage, the same business owner can't afford that hire. The employer needs to ensure that the employee will be worth the high wage, and now diplomas, past work history, or an impressive interview are required. With these barriers to entry, those at the bottom can't get a job, and without one, they can't afford an education to learn the skills needed. They become trapped, with no legitimate means to improve their position.

A low minimum wage, or none at all, would allow an apprenticeship system to redevelop in this country. Low-skilled workers could be trained on the job and work their way through the ranks. Instead, as we follow our emotions blindly in support of minimum wages, we increasingly shut the door on one of the best ways to get motivated people out of poverty.

There is nothing self-serving in the motives of the average proponent, but the loudest supporters, who make the minimum wage an issue in each campaign, do have something to gain.

As stated earlier, ideally, the job market is a place where workers compete for the best jobs and businesses compete for the best workers. If two applicants both meet a job's minimum requirements, the person willing to work for less will usually win the job, and in a fair market, that's the end of it. In reality, there are a number of things that the losers can do to prevent competition. The most well-known method is to conspire to set the wages that all employees must be paid. This is the form of collusion employed by labor unions. As with government-mandated minimum wages, union minimum wages prevent low-skilled labor from offering to work for less. If you have to pay an unskilled and skilled worker the same, the skilled worker gets the job.

With this understanding, is it any wonder that unions are usually the loudest proponents for high minimum wages? They understand that preventing the unskilled from competing protects their high wages, and the higher the minimum, the easier it is to demand an increase in their own pay rate. Since unions make up the largest special interests, and donate almost exclusively to Democrats, it's obvious why Democratic politicians support the minimum wage. These groups are not out to help the poor; they are out to help themselves.

If a politician wanted to pass a minimum wage of $50 an hour, he'd be laughed at, because we realize that politicians cannot simply pass a law to make us rich. We should also remember that they cannot do the same to end poverty. We need to return to reality and begin opening the doors to opportunity that we've closed in our ignorance. The next time a Democrat promotes the minimum wage, ask if he is helping the poor or his biggest campaign donor.